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Report No. 6597-SL

Sierra Leone: Issues and Optionsin the Energy Sector

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bft io do pint NPIbtd Bank Energy Sector Assessment ProgramThis d euntent hs.a amEnstricted distribution. Its contents may not be disclosedwithout at-ithorization from the Government the UNDP or the Wbrld Banik.

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JOINT UNDP/WORL) BANK ENERGY SECTOR ASSESSMENT PROCRA!M

Reports Already Issued

Country Date Number

Indonesia November 1981 3543-INDMauritius December 1981 3510-MASKenya May 1982 3800-KESri Lanka May 1982 3792-CEZim.babwe June 1982 3765-ZIltHaiti June 1982 3672-HAPapua New Guinea June 1982 3882-PNGBurundi June 1982 3778-BURwanda June 1982 3779-RWMalawi August 1982 3903-MALBangladesh October 1982 3873-BDZambia January 1983 41:0-ZATurkey March 1983 3877-TUBolivia April 1983 4213-BOFiji June 1983 4462-FIJSolomon Islands J.,re 1983 4404-SOLSene,.al Jtjl Y 1983 4182-SESudan Jliy 1983 4511-SUUganda JuI y 1983 4453-UCNigeria August 1983 4440-UNINep,a AugL3t, 1983 4474- NEPThe Gamibia N)vemrber 1983 4143-GMPeru Janu ary 1984 4677- EPCosta Rica January 1984 465,-CRL.esot.hn .Jan'.ary 1984 4676-LSOSeychelles nan ar-y 1984 4693-SEYMorocco March 1984 4157-.M0RPortug, al. Apri 1 1984 4824-PONiger May 1984 4642-NIREthiopia Julv 1984 4741-ETCape Verde August 1984 5073-CVGuinea 8issau August 1984 5083-GUBBotswana Spptember 1984 4998-BTSt. Vincent andthe Grenadines September 1984 5103-STV

St. Lucia September 1984 511l-SLUParaguay October 1984 5145-PATanlzania Novembier 1984 4969-TAYemen Arabh kepubi)C icecemn-,er 1984 4892-YARLiberia December 1984 5279-LBRIslamic R ep Li b tMaoritania tA)pril, 1985 5224-MAU

Jam?iri C r3 1 8 5466-EMr ')rv Co ....r a ! 3O- I C 5

sen iI n . 22- 2 F N

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FOR OFFICIAL USE ONLYREPORT NO. 6597-SL

SIERRA LEONE

ISSUES AND OPTIONS IN THE ENERGY SECTOR

OCTOBER 1987

This is one of a series of reports of the joint UNDP/World Bank EnergySector Assessment Program. Financing for this work has been provided, inpart, by the UNDP Energy Account, and the work has been carried out bythe World Bank. This report has a restricted distribution. Its contentsmay not be disclosed without authorization of the Gcvernment, UNDP andthe World Bank.

ABSTRACT

41tLough Sierra Leone is favorablv endowed with energ,resources, particularly forestry and hydro-power, over the past few yearsiL has experienced severe shortages of energy supplies which havedisrupted economic activity. The major sources of difficulty are: (a) alack of foreign exchange to pay for oil imports and maintenance materialsfor plant and equipment; (b) an almost total dependence of the modernsector of the economy on imported energy products; and (c) weaknesses inenerSy sector institutions and lack of technical expertise for theplanning and management of energy resources. Despite these difficulties,there are grounds for optimism. The Government has initiated a programof economic reform which, if sustained, would relieve the foreignexchange shortage. At the same time, oil prices have declined in thepast year, providing an opportunity for the Covernment to develop acoherent policy for the energy sector to avoid future difficulties.

The assessment report focuses on the major short-term and long-term issues facing the sector. In the short-term there is a need to:(a) improve the supply o electricity and petroleum products;(b) strengthen demand management to encourage the effisient use andalLoca,ion of energy resources by reLating energy prices to the costs ofsupply; and (c) initiate institutional reform to improve sector coordina-tion, enhance the autonomy of the parastatal energy agencies, andincrease the incentives on the part of parastatals to supply energy atleast cost. Over the longer term, perhaps the most pressing issue is theextent to which it would be economic to develop indigenous energyresources and production facilities to substitute for high costimpotis. Within this context, the report considers options for meetingfuture power requirements, the dispcsition of the refinery, and astrategy for increasing fuelwood supplies. A priority energy investmentprogram is outlined in the report, together with a supporting plan fortechnical assistance and diagnostic studies.

ACRONYMS

BP British PetroleumDTI Department of Trade and IndustryFIC Forest Induetries CorporationIMF International 4onetary FundNPA National Power AuthorityNP National PetroleumMDEP Ministry of Development and Economic

PlanningMANRP " nistry of Agriculture, Natural Resources,

_nd ForestryMEP Ministry of Energy and PowerMIS Management Information SystemMOF Ministry of Finance

PlanningMOm Ministry of MinesMOT Ministry of Transport and CommunicationsMTI Ministry of Trade and IndustryNGO Non-governmental OrganizationSIERMOCO Sierra Leone Bauxite Mining Compar.ySLPRC Sierra Leone Petroleum Refining Company

ABBREVIATIONS

bpd barrel per dayDWT deadweight tonCi gigajouleGSP Government selling priceGWh gigawatt hourha hectareHV high voltagekcal kilocaloriekg kilogramkm kilometerkV kilovoltkWh kilowatt hour1 literLRMC long run marginal costLX low voltagem cubic meterMi megajouleMV medium voltageMT metric tonSRMC short run marginal costTOE tins of oil equivalent

CURRENCY EQUIVALENTS

US$1.00 = 5.10 Leones (Le)

This was the exchange rate at the time of the mission (February 1986) andis the rate used in the repcrt unless otherwise stated. The Leone hassince been floated.

ENERGY CONVERSION FACTORS

Energy

Form Calorific Value TOE/ton

(mil lion kilocalories/ton)

Biomass

Firewood (700 kg/m3) 3.5 0.343

Charcoal 6.9 0.676

Agricultural Residues 3.0 0.294

Petroleum Products

LPG 10.8 1.059

Gasoline 10.5 1.029

Jet Fuel 10.4 1.020

Kerosene 10.3 1.010

Gas Oil/Disel 10.2 1.00

Fuel Oil 9.5 0.941Crude Oil 10.2 1.00

Electricity

Calorific Value: 860 kcal/kWh (0.084 TOE/MWh)

Other

I metric ton of crude oil = 7.505 barrels of Nigerian Bonny Light1 Imperial gallon = 1.2 U.S. gallons

This report is based on the findings of an Energy Assessment missionwhich visited Sierra Leone in February 1986. The mission team consistedof: Messrs. A. Ferroukhi (Mission Leader): I. Aleem (Deputy MissionLeader); J. Boroumand (Researcher); P. Beard (Power Specialist); W.Matthews (Petroleum Refining and Distribution Specialist); R. de Lucia(Household Energy Specialist), and J. Rochet (Geologist). Mr. Aleem isthe principal author of the report. Secretarial support was provided byMs. Morrissa Young and Mr. Basha,at Ahmad.

TABLE OF COVITS

SUMMARY AND RECOMMENDATIONS .............................. .i

I. ENERGY A!JD THE ECONOMY ............................... * . 1The Economy ..... ....... 9.....**. 1External Trade Gap ........ ............................ 1Recent Developments ..... * *...*..................... 2Economic Scenarios for Sierra Leone..................... 3

Energy-Economy Interactions............................... 4Key Energy Issues .... *............................. ... 6Energy Consumption Patterns ...... ............. ........ 7Consumption Patterns Under Alternative Scenarios.......... 9Energy Resource Base...... .....9999 *99999999999999999999999 11Institutional Framework... ...........9 . ...... 9 99 12

II. PETROLEUM .................... o.......... . . . 13Introduction ...................... , 13Recent Developments and Subsector Organization.* ......... 13Short-Term Issues ....................... 16Procurement ........ .................................. 16Demand Management and Pricing ........................... 20The Role of the Government in ManagingShortages and Crises.. ......*s**............. 26

Long-Term Issues ..... ......... 00......**9*..... 28Future Demand for Petroleum Products.................... 28The Viability of the Refinery .......................... 30Recommendations .................................. 33Oil Exploration .................... 33Subsector Organization.. ... .. 99 36

Investment and Training Requirements...................... 37

III. ELECTRICITY ................. so,.... 40Introductio. .................... 40Institutional Reform: Raising the Effectiveness ofNPA Management ................................a....... 42

Institutional Framework .............999......99.9.99..... S., 42Managerial and Technical Problems Within NPA............. 44aecommendations .... *999999999999999999999999 999999999999 45

Physical Rehabilitation of the Public Power Supply ........ 47Concerns About Existing Rehabilitation Plans ............ 51

Tariff Policy, Demand Management, and FinancialRehabilitation..* ......................... 52Demand and Supply Side implications of Tariff Policy ...... 53Supply Costs and Tariffs ................................ 57Recommendations ......O-..... . .. .... 59

Lcns-Term Issues ..................... . . . ... ..... ............ *0 *e@. 60Bumbuna vs. Other Development Options..................... 61Development Options for Provincial Load Centers........... 71

Reconmendationso.... ... .. ........ *******. .......* *..*. 73Investmento .. *.ooo.o.o.ooo..o..oe*ooooo.o....................... 75

Trends 1981-1986 ..' o o.$..0 .06 0 0 6 4 ..............0.................. 75Future Requirements. ................... ... . . . . .. 77

IV. WOODFUELS/HOUSEHOLD ENERGY.......................... 78Reasons for Concern..... ... .o.9. .... o..o.o. .o** **ooooo * 78Characteristics of Household Energy Use...... ........ 0... 79Woodfuel Supply and Demand .....o.... ...... ......... .... 82Household Energy/Woodfuel Strategy ............... ................. 85

Supply Side Measures... .................... o..,.... 90Main Supply Side Recommendations........................ 9)Changes in the Inst;tutional Frameworko ............ o 94Recommendations. . ....... ... .**oGo...o........... 96Evaluation of the Potential of Other Energy Sources ..... 96Recommendationso.......................................... 100

Investment and Technical Assistance Program...o.oa...to... 100

V. ENERGY SECI'OR MANAGEMEN.. .... o .... ... o..... o. .o..0.0.. 102Introduction ......... .. .............. 102Energy Sector Coordination and Planning ..... ,.,,........ 102

Problems with Existing Institutional Frameworko...... too 102Reco m mendations... o ............................ 00 103

Investment Planning/Aid Coordination...............*... 104Availability of Funds. .. .104Investment Requirementsq.........m.. . . ........ .. . . . . 105Aid Coordination and Monitoring-o............... ........ 106

TABLES

1.1 Scenarios (Summary) ....................... ..... 41.2 Petroleum Imports and External Trade . .............. 51.3 Structure of Final Energy Consumption (1984) ............. 0 81.4 Final Energy Consumption, 1995, Accelerated

Growth Scenario..........o.......to.........o*. .......... 91.5 Final Energy Consumption, 1995, Base Case Scenario ..... o...... 102.1 P2troleum Subsector--Basic Data ........ o ...... ....... 142.2 Sierra Leone Crude Oil Imports ............... ... o.......... 172.3 Comparison of Official Retail Prices in 1985................. 202.4 Sierra Leone Official Petroleum Product Prices

and Economic Cost of Supply u.......... - ..... . .. 212.5 Comparison of Official 1985 Ex-Refinery Prices

with Hypothetical Costs of Direct Imports .................... 222.6 Revise,i Petroleum Product Price Structure................... 242.7 Forecast Summary of Inland and Bunker Der,|and: Accelerated

Growth Scenario with Reduced Pumbuna .... .. ..... ...... 292.8 Forecast Summary of Inland and Bunker Demand: Base

Case Scenario with Reduced Bumbuna .................. 29

2.9 Refinery Ownership. ......................... ........... .. .0 302.10 Refirery Investments... .. .. . .. .. . .. . . . ... .*. .... 373.1 Power 3ubsector--Basic Data ... 413.2 Power Plants on Western Area G r i d 483.3 Casoi Ordered and Supplied (1985) 503.4 NPA Generation and Sales ................ 533.5 NPA long Run Supply Costs ... 573.6 Demand Forecast ... 613.7 Bumbuna Hydro Project ... 643.8 Comparison of Bumbuna Options ... 673.9 Bumbuna Surplus Energy in Wet Season (AC Scenario) ... ...... 713.10 Details of Sniall Hydro Schemes....... 723.11 Estimated Investment in NPA Assets FY1981-86 753.12 Estimates of NPA Investment Requirements FY1987-91:

Base Case Scenario................ ..... I 763.13 Estimates of NPA Investment Requirements FY1987-93:

Accelerated Growth Scenario ......... ..... ... . 764.1 Household Energy Expenditures as a Share of Monthly Income... 784.2 Estimated Household Energy Consumption, 1 9 8 .804.3 Comparative Costs of Cooking Fuel.s in Freetown,

February 1986 ........... ................................. 814.4 Forest Resources and Annual Wood Incre ms . . .834.5 Woodfuel Demand (1986) ....................................... 844.6 ComparaLive Cooking Cost of ALternative Stoves. 874.7 Investment Program (1987-91): Household and

Renewables Sectorse.. .. ........... 1015.1 Energy Sector Public Investment Requirements, 1987-91 105

ANNEXES

1 Scenario Details.. ....... 1082 Energy Balances ............................................... 1123 Retail Petroleum Product Price3 .. 1174 Crude Oil arid Product Price Forecast ..... 1185 SLPRC Refinery Economics ........... .. O. 1206 Petroleum Concessions . .... 1217 Autogeneration of Electricity in the Area of Western

Power Grid ............... 1228 Regression Analysis . ...... ... 1269 Relationship of Load Forecast, GDP and

Electricity Generation ..... 12910 H:storical Pattern of Tariffs .............................. 13111 Generation Cost Estimates. .................. .. ......... 13212 Future Generation and Consumption of Electricity,

by Scenari G . 13913 Alternative Expansion Pans ... 14214 Bumbuna Capital Cost Estimates . . 14915 Future Coal and Crude Oil Prices, by Scenario . ............... 15816 Effect of Bumbuna Scheme on Foreign Exchange Balance.. 159

17 Future NPA Supply Costs andTariffs.......................... 16118 Household Energy Survey Results .............................. 16719 Retail Price Movements in Household Fuels.................... 16920 Current Cost/Price Build-up for Fuelwood Retailed in

Two Different Areas of Freetown, February 19868 6............. 17021 Energy Putential from Availabl.e Agricultural Residues

in Sierra Leone....... ................ *****....********** 17122 Lignite Deposits it. Sierra Leone--Yema Araa 172

NAPS

IBRD 20078 Sierra LeoneIBRD 20079 Power System and Potential Hydroelectric SitesIBRD 20080 Natural Forest Regions

SUMMARY AND RECOMMATIONS

Overview of Energy and the Economy

1. Energy consumption in Sierra Leone is dominated by Luelwoodwhich accounts for about 80% of the energy used. The remaining 20% issupplied by imported oil. Fuelwood is the traditional form oi energy andis used almost exclusively by households for cooking and for traditionalcraft activities. Petroleum, on the other hand, is the most inportantsource of energy for the modern sector of the economy. In recent yearsforeign exchange difficulties have restrained petroleum imports and re-duced the share of oil consumption in the overall energy balance. Futuregrowth in consumption is expected to show a return to the longer termhistorical trend of a shift towards modein fuels, primarily oil but alsohydroelectric power, a resource which is still virtually untapped.

2. Gross energy consumption (including conversion and distributionlosses) is estimated to have grown between 1975 and 1984 at an annualrate of 1.7% to some 1.2 million tons of oil equivalent (toe). Over thesame period GDP growth has been sluggish, averaging about 2%, so that theratio of the growth in energy consumption to that in GDP has been lessthan one, which is below the average fo;- most developing countries.Petroleum consumption peaked in 1979 at around 178,000 tons and has beenon a declining trend since then reaching 167,000 tons in 1984. The 1984gross energy consumption of 1.2 million toe represents a per capitaconsumption of 310 kilograms of oil equivalent (kgoe); per capita con-sumption of commercial energy was about 60 kgoe, sqich is about averagefor countries with similar income per capita (US$330 in 1983). House-holds and transportation were the two largest users of energy in 1984,representing 86% and 6% of final dem-nd. Industry ranked third with 5%of demand.

3. Sierra Leone, with a population of 3.7 million people, isreasonably well endowed with energy resources, particularly forestry andhydroelectric power. The annual supply of woodfuels from the country'sforests is estimated at around 4 million m3 , about 10% of which isconsumed in Freetown. Annull sustainable yields of wood are estimated atbetween 9 and 15 million m but a large part of this supply is not eco-nomically accessible and there are growing signs of regional shortagesnear urban areas. There is an extensive network of rivers and tribu-taries which provide a las-ge hydroelectric power potential conservativelyestimated at 1,200 MW. Technically, and economically, the most promisingsite is at Bumbuna, on the Seli River, with an ultimate potential of305 MW of installed capacity. Around 20 mini-hydro sites have also beenidentified but their feasibility has yet to be fully evaluated. The onlydevelopment so far has been a mini-hydro plant of 4 MW capacity which isbe.ng built with Chinese help. As far as petroleum is concerned, thereis a potential for offshore reserves but limited exploration efforts haveprevented an evalJation of this potential.

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4. The oil price shocks of the 1970's had caught Sierra Leonetotally unprepared to cope with the "energy crisis." It was entirelydependent on petroleum imports for satisfying its non-traditional energyneeds and had not developed any indigenous energy resources to substitutefor high cost imports. At the same time, as in many other developingcountries, there was practically no institutional structure, little or notechnical expertise, and modest economic resources to manage this complexproblem. The oil price shocks arrived at a time when the country wasalready facing foreign exchange difficulties because of declining mineralexports. The net result of these developments has been a severe shortageof commercial energy supplies since the early 1980s with attendant dis-ruptions to economic activity.

5. While the problems currently faced by the energy sector aresevere, there are grounds for optimism. Firstly, discussions currentlyunderway with the International Monetary Fund and the World Bank should,if an agreement is suc:cessfully concluded, help to ease the foreign ex-change difficulties, a problem at the center of many of the energysector's difficulties. Secondly, the price of oil has declined signi-ficantly in the past year. While the future course of oil prices isuncertain, if, as expected, prices remain so over the next two to threeyears, then Sierra Leone has a good opportur ;y to prepare itself for anysharp increases in the future price of oil. The Government should aim tomaximize the benefits to the economy from the current low oil priceenvironment while developing a coherent policy for the energy sector thatwould help avoid a recurrence of the problems currently facing thesector. In particular the Government should urgently consider optionJwhich would: (a) encourage the efficient utilization of resources avail-able to the energy sector (focusing on projects with high rates ofeconomic return rather than those saving foreign exchange at low rates ofreturn); (b) enhance the use of domestic energy resources where economic;(c) diversify the country's fuel mix away from a high dependence on oil;and (d) develop an incentive framework and institutional structurecapable of adapting to and benefiting from rapidly changing conditions ininternaLional energy markets.

6. Within the above setting, this report focuses on the mainshort- and long-term issues in the sector, evaluating the options open tothe Government and making recommendations as appropriate.

Short-Term Issues

7. The assessment mission found the energy sector in a seriousstate of deterioration which has resulted from, and contributed to, theprolonged stagnation in the economy. While oil imports have beenrestricted for some time, the cutback in 1985 was particularly severewith net petroleum imports declining about 40% below 1984 levels. Thisdevelopment was accompan ed by additional limitations on the imports ofspares by the power utility. The resulting disruption to the cconomy

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from the lack of fuel was significant, especially in rural areas. Trans-portation services were greatly curtailed, and electricity supplieslimited to a few hours a day with some areas going without electricityfor as long as a month. Even the output of diamonds--a major foreignexchange earner--was reported to be declining sharply because fuel wasnot available to power mining equipment. Fuel shortages have also led toa rampant black market in petroleum products, and encouraged inter-fuelsubstitution: urban households have increasingly switched over to thetraditional fuels, enabling fuelwood prices to rise 150% in real termsbetween 1984 and 1g8', thereby imposing a heavy burden on low incomegroups. Similarly, to obtain more reliable electricity supplies, largeindustrial, commercial, and well-off residential consumers have beenimporting diesel generating sets financed partly from foreign exchangepurchased in the "parallel" market, outside the banking system. Over thepast three years, the cost of importing these generating sets is conser-vatively valued at about $10 million--further exacerbating foreign ex-change shortages.

8. The most urgent short-term needs are to improve the supply ofelectricity and petroleum products and strengthen demand management andinstitutions.

Shortage of Electricity and Petroleum_Products

9. In the petroleum subsector, supply shortages due to foreignexchanoe difficulties have been exacerbated by inefficiencies in theprocedures for procuring crude for the refinery. There are two problemsassociated with crude supplies: 'a) the supplies are not at least cost,and (b) ad hoc arrangements have led to delays in allocating foreignexchange for crude purchases.

10. The mission found that Sierra Leone has been paying an "excess"margin between c.i.f. and f.o.b. values of about $2.50/barrel on crudesupplies, equivalent to about $10 million over the past three years(1983-85). Excessive margins of similar magnitude also appeared to havebeen paid in the last two years (1981-82) of an earlier agreement withthe oil company shareholders of the refinery. This is in large part dueto the use of open-ended contracts at fixed terms with one supplier.Such contracts are non-competitive and invite monopoly rents whether thesupplier is an oil company or, as at the time of the mission, a tradingagent implementing the shipping arrangements for the Government's state-to-state deal with Nigeria. Currently, however, the ability of theGovernment to obtain more competitive terms for oil supplies is compro-mised by the non-payment of the outstanding debt (totaling $58 million)to the oil company shareholders of the refinery for past deliveries ofcrude: the presence of the debt limits the number of suppliers preparedto supply crude.

II. Despite the excessive margins paid for crude supplies overrecent years, deliveries have not always arrived when needed. Foreignexchange problems have resulted in a last minute scramble to find suffi-

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c,ent funds for each cargo. There is no system for budgetitig or allo-cating foreign exchange for purchasing oil supplies on an annual basisand then properly programming this allocation to each shipment.

12. The mission recommends that the system for procuring crude oilsupplies should be reorganized and made more competitive. The state-to-state deal with Nigeria is in Sierra Leone's interest and should beretained; this recommendation is based on considerations of proximity(the refinery's economic viability, as discussed below, is closely tiedto the availability of Nigerian crude as it provides transport costadvantages over other crudes), and the suitability of the crude to localmarket demand and assumes that Nigeria will continue, as in the past, tooffer the crude at competitive terms relative to the international mar-ket. However, international bids should be invited for the management ofcrude supply and shipping arrangements At the same time, the system forallocating available foreign exchange should be reorganized so thatdelays in oil payments can be avoided. These measures together with anincrease in cargo sizes (to 30,000 tons from the current level of 20,000tons) should comfortably reduce margins by $3/barrel, equivalent to morethan $5 million a year, and enhance the reliability of oil supplies.However, effective implementation of such an arrangement will require atleast a demonstrated government willingness to address the problem of therefinery's existing debt.

13. In the power subsector, the public utlity is in a state ofphysical and financial disrepair, reflecting years of neglect, poormanagement and a shortage of foreign exchange. At the time of themission, less than half the installed generating capacity was in service,between a third and a half of the electricity generated was being lost intechnical and non-technical losses, and consumers were experiencingfrequent and prolonged supply interruptions. These problems intensifiedfurther in the mont[s following the mission, reaching crisis proportionsin September 1986 when only 6 MW of capacity was available to service anestimated peak demand of 25 MW. While supply has improved since thattime and demand of about 18 MW is currently being met, the fact remainsthat the National Power Authority (NPA) is unable to meet its responsi-bilities of providing adequate and reliaole power supplies. NPA'scurrent difficulties are the latest in a long history of managerial,technical, and financial problems at the utility during the last twentyyears.

14. The major short-term issue relates to the institutional,physical, ana financial prerequisites for a successful rehabilitationprogram. These include: (a) an institutional framework which wouldallow the utility to operate autonomously, give adequate compensation toskilled staff, and ensure the effectiveness of senior management; (b) re-pairs and improvements to existing generating facilities; and (c) changesin tariffs and access to required levels of foreign exchange. Components(a) ani (c) of the rehabilitation programn are discussed below underinstitutional reform and demand management. In terms of physicalrehabil:.tation, the operational deficiencies associated with the decline

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in power supplies arise out of two related factors: a lack of preventivemaintenance and a chronic shortage of spare parts due to foreign exchangelimitations.

15. The main priority is for arrangements to be made for over-hauling and repairing all the generating plant at the Kingtom stationnear Freetown, along with the importation of spare parts to maintain thesystem in a good state of repair. Enhancing the reliability of powersupplies will save the country an estimated $4 million annually bydiscouraging the importation and use of small (and less efficient interms of fuel consumption) private generating sets. These savings wouldhelp to pay for a major part of the estimated $10 million of necessaryrehabilitation expenditures. At the same time, an independent reviewshould be carriei out urgently to determine the details of therehabilitation program, including the technical and economic viability ofrepairing the (three) MAN units at Kingtom which are nearing the end oftheir normal working lives. Contingency plans should also be made fornew generating capacity to replace these units in case they cannct beeconomically repaired.

Institutional Reform

16. Institutional deficiencies represent a major obstacle to theefficient and reliable supply of energy. These deficiencies include:(a) the absence of a single ministry for formulating and coordinatingenergy sector policy, and (b) the absenc' of incentives on the part ofparastatals to supply energy at least cost. In the case of both electri-city and refining the last problem is further complicated by a blurringof the distinction between government and parastatal roles in operationsand investment. The measures proposed below complement the components ofan economy-widp restructuring of the public enterprise sector proposed aspart of the Structural Adjustment Loan program, currently under discus-sion between the Government and the World Bank. In addressing theseproblems, the mission evaluated (i) the scope for coordinating policy inthe energy sector, (ii) the effects of lack of autonomy on the function-ing of the parastatals, especially NPA, and (iii) the scope and optionsfor reducing costs in the parastatal companies.

17. Absence of Coordination. There is no single ministry orautonomous body with the political mandate and status to coordinate theactivities of the various ministries and develop a coherent energypolicy. At the moment, there are five ministries dealing with specificenergy subjects in an uncoordinated manner. This lack of coordinationhas, in turn, contributed to the chaos experienced during fuel short-ages. The Ministry of Energy and Power (MEP) is in theory responsiblefor coordinating all energy activities. In practice, the MEP's mainpreoccupation has been with electrical power and water distribution; theMEP does not, in effect, have the status or the political mandate tocarry out a sector coordination role. To strengthen sector management,it is recommended that the MEP should be given the status and supportnecessary for coordinating activities in the energy sector. In addition,

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to make the proposal effective, the institutional responsibility forcrude oil and product imports, refining, and oil product marketing whichcurrently rests with the Ministry of Trade and Industry (MTI) should betransferred to MEP. At the same time, MEP should assume responsibilityfor overseeing conservation policy and programs. For implementing thesechanges, it is recommended that (a) appropriate resources should be madeavailable to MEP; (b) MEP should draft a detailed proposal of what itsenhanced role would entail and how it plans to carry out its increasedresponsibility; and (c) consensus should be established at the highestlevels of Government (i.e., within the Cabinet of Ministers) for such achange, especially as it will involve, as envisaged, a transfer ofresponsibilities for an important portfolio, namely petroleum supply,refining and distribution.

18. Separation of commercial and administrative functions. Thereis both political interference with, and lack of management autonomyamong, the parastatal energy agencies (NPA, NP, the Refinery). Thisproblem applies particularly to NPA, which operates as a department ofMEP. The General Manager )f NPA lacks a.,tonomy and is subject to dailyinterference from the MEP. The 1982 NPA Act is intended to provide NPAwith a high degree of autonomy through an independent Board. In practicethis is not the case, and the Board itself is highly susceptible to MEPinterference. The lack of autonomy undermines the effectiveness of NPAManagement. To increase the effectiveness of NPA, the NPA Act should bereviewed and modified to give the Authority greater autonomy in itsmanagement. This legal separation should be carried out as part of anaction program for changing the institutional framework within which NPAoperates before the implementation of any physical rehabilitationmeasures. Unless such a change takes place, physical and financialrehabilitation will not bring about a sustained improvement in the publicpower supply, and which should be the objective of the rehabilitationprogram. More recently, there have been improvements in the relationshipbetween NPA and MEP with the appointment of a new Board. While thesechanges are in the right direction, the basic problems of autonomy andlack of representation from the businesb community remain: (a) the Boardis still over-represented by incumbent or ex-civil service per3onnel;(b) it does not have members from the private sector, which would providethe Board with the benefits of sound commercial expertise; and (c) thelimited autonomy that the Board may enjoy currently is dependent on thegood will of the incumbent Minister of Energy and Power. The Government,while agreeing to the recommendation in principle, has indicated thatpulitical constraints will, at present, prevent changes tn the NPA Act.However, it has agreed to these changes as a target for the future.

19. Other components of an action program should include:

(a) a mechanism to ensure that (i) NPA can regularly set tariffsat levels which allow it to recover its costs on an agreedbasis, and (ii) it has access to sufficient foreign exchangefor importing spare parts and carrying out routine equipmentmaintenance;

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(b) a requirement that in return for greater legal and financialautonomy, NPA should be run on a ccmmercial basis achieving atarget rate of return and be fully accountable for its perfor-mance in providing reliable power supplies;

(c) the focusing of MEP's efforts on power sector policy formula-tion and coordination--one of its first tasks should be thedevelopment of a policy statement outlining the Government'sstrategy for the sector in the short and longer term; and

(d) an increase in the remuneration of skilled NPA staff to makethem competitive with the private sector. (This will require apremium to be paid above public service scales as a compensa-tion for technical skills.)

20. Cost effectiveness and competition. The cost effectiveness ofthe operations affecting the parastatal companies, the Sierra LeonePetroleum Refining Company (SLPRC) and the power utility (NPA) can beenhanced through greater market competition combined with a strengthuningof the monitoring and regulatory functions of Government.

21. The possibility of reducing crude procurement costs by puttingup supply contracts to international tender has already been touched uponabove. A rela.ed area, under the supervision of the Department of Tradeand Industry (DTI), where current arrangements are not conducive to leastcost supply is that of petroleum product supplies. Because SLPRC has amonopoly over the supply of refined products to the domestic market, thecountry cannot take advantage of favorable conditions in internationalmarkets by importing products when they are cheaper than the refinery'soutput. The economic losses associated with these arrangements may onoccasion be considerable and are not likely to be entirely eliminated bymeasures for more efficient use of the refinery as proposed below. DTI(or, if responsibilities are transferred, MEP) should therefore considerthe possibilities for introducing competition into product supplyarrangements. One possibility is to open up domestic product market tointernational tender. Another alternative is to require SLPRC to supplyrefined products from the cheapest possible source, combined with alinking of ex-refinery prices to spot markets.

22. NPA has a monopoly on national electricity supply. At present,the role of private electricity suppliers is confined to autogenera-tion. NPA exercises this monopoly in the provinces by managing andcoordinating the operations of 22 widely dispersed provincial stations.This coordination is a costly overhead and NPA should consider otheroptions for increasing cost effectiveness. These should include:(a) decentralization of operations so that they can be managed on a localbasis, (b) selling the Provincial Systems to the private sector or localcommunity groups, when such possibilities arise, and (c) establishingjoint ventures with the mining companies for generation facilities thatsupply both the mines and local communities.

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23. Cost effectiveness has also been weakened by deficiencies inthe monitoring and regulatory functions of gcvernment. The regulatoryrole normally pleyed by government is reduced because of a severe lack ofresources (Forestry Department), lack of access to petroleum marketintelligence (MTI), and organizational deficiencies such as the abselceof planning cells. The full impact of this deficiency is difficult toquantify but, as an example, US$5 million per annum in excess paymentsfor oil imports over the past five years, as already discussed above,could have been avoided if the DTI could have monitored the oil marketnore effectively. It is, therefore, important that more resources aremade available to the DTI (or, if responsibilities are transferred, MEP)and the Forestry Department to carry out their regulatory functienseffectively.

Demand Management

24. In conjunction with supply side measures the problem of severeenergy shortages should be addressed Lhrough better demand management,primarily through pricing policies which reflect economic cost. Inparticular, prices for eLectricity and petroleum products need to beraised significantly to cover the opportunity cost of supplies atrealistic exchange races. The prices of petroleum products in SierraLeone are well below their opportunity cost to the economy; even afterthe recent increases announced in the April 1987 budget, retail pricesare about 25% below the level which the mission estimates should becharged to reflect (a) the opportunity cost of oil products, based oncrude oil prices of $20 per barrel, and (b) a tax structure which is anaverage by West African standards. The Government lacks a cohesivedemand management policy. Both the level and str'icture of prices need tobe reviewed immediately to eliminate pricing distostions and reduce thesubsidies that magnify the financial troubles of the Government andsubsector organizations such as the refinery. Beyond this pricingreview, the Government should reconsider the objectives and policyunderlying the establishment of ex-refinery and retail prices, parti-cularly at this time of uncertainty in international oil markets.Furthermore, a pricing review should be carried cut in conjunction withan evaluation of product supply strategy (as discussed above in the con-text of institutional reform at the refinery) and not independent of it.

25. Together with a strategy for rehabilitating the supply ofelectricity, the problem of power shortages should also be addressedthrough better demand management including changes in power tariffpolicy. In the long run, tariff increases would help to alleviateshortages by dampening demand, but because of the magnitude of suppresseddemand, the more immediate impact of tariff increases is likely to comefrom an improvement in supplies through a strengthening of NPA'sfinances. At the time of the mission, tariffs were well below both theshort and long run costs of providing power and thus contributed to NPA'sprecarious finances.

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26. In November 1986 the Government, in discussions with the Bank,agreed to raise the tariffs by 300% to Le 3.75/kWh (or US15c/kWh, at anexchange rate of Le 25/$). This is a move in the right direction.However, given the recent rapid decline in the value of the Leone (inMarch/April 1987 the official exchange rate was fluctuating in the rangef Le 45-

x

River. An evaluation of these options, to meet future demand to the year2020, suggests the following two general conclusions:

(a) The rehabilitation of Kingtom and Falconbridge plants shouldprovide sufficient capacity to meet demand in the Western Areawell into the 1990s. The chances for an earlier commissioningof new generating facilitivas would rise if the older (MAN)units at Kingtom cannot be restored to full service.

(b) A reduced form of the Bumbuna scheme (followed by a purethermal development) with an installed capacity of 47 MW is theleast cost solution within the set of thermal and hydro optionsexamined, over a wide range of load forecast and oil priceassumptions. This development will also allow diversific,tionof the country's energy supplies and provide some insuranceagainst oil supply disruptions. The-e may, however, be someroom for improvement in the design and sequencing of theproject, which as currently envisaged by the consultants is notoptimal.

A preliminary estimate of the balance of payments impact of theReduced Bumbuna scheme suggests that the outflows for debtservicing will be partially offset by the gains from thedecline in oil imports due to the use of the hydroelectricscheme. The results show that over the life of a 12 year loan(at a 10% interest rate) the Reduced Bumbuna scheme will leadto greater net outflows than the pure thermal scheme, but thelevel of excess outflows is relatively small--on average of $1-2 million per annum. Beyond the loan repayment period, theinvestment will save between $5-10 million--depending upon oilprices--per year in foreign exchange through the reduction inoil imports. The balance of payments impact will be morefavorable to Sierra Leone if it can obtain better terms forfinancing the investment than has been assumed in the analysis.

While the reduced Bumbuna scheme will not add significantly todebt servicing compared to thermal alternatives, initialfinancing of such a lumpy investment could create problems,given the constraints on foreign exchange resources (includingborrowing) over the next five years. However, financingconstraints by themselves shuuld not be a sufficient rationalefor cancelling or significantly delaying the project if it iseconomically and technically sound. The financing aspects ofthe problem need to be looked at more carefully including:(i) the economic rate of return on the project relative tothose on other investments which also have claims on foreignexchange resources; (ii) the magnitude of suppliers creditavailable for the project (which would represent additionalresource), a ' (iii) options available to the Government forbetter management of the financial problems caused by theinvestment in Bumbuna.

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31. Provincial systems. There are a number of mini hydro schemes,identified in recent studies, which could meet a high proportion of ther.ining sector demand with consequent savings in fuel imports. The via-bility of these schemes has not been fully studied, but two schemes,Singimi Falls (7.2 MW) and Benkongor Falls (10.8 MW), merit furtherevaluation. Initial assessment of the schemes, which are not run of theriver, suggests that they will yield high economic returns.

32. There are a number of possibilities for interconnect;ngisolat'2d power systems. These should be carried out if economic.However, a policy should be identified for future interconnections toprevent haphazard development and to ensure that the design meetsnational standards.

33. Main recommendation. NPA should attempt to resolve a number ofunanswered questions before making a final decision on the Bumbuna schemeand the development pian for the Provincial Systems. Among other things,NPA should (a) review the design, sequencing, and financing of thereduced Bumbuna project; (b) investigate the prospects of exportingsurplus energy from Bumbuna to Guinea; (c) evaluate the viability andoptimum sequence of development of the more promising mini hydro schemes;and (d) define technical standards to be adopted in interconnectingisolated Provincial Systems.

The Economics of Refinery Operations

34. The refinery, run entirely by Sierra Leone nationals, isoperationally and managerially sound even though it is suff-ring fromcrude shortages, attendant shutdown and start up of operations, and istechnically bankrupt from assuming the cumulative interest on theGovernment crude debt to the oil companies. There is a case forretaining the refinery as an operating entity. Based on current andprojected long term crude and product prices, it is marginally viable;however, it also constitutes a center of managerial and technicalexcellence in Sierra Leone, a hydrocarbons testing laboratory, andprovides employment and training spin-offs.

35. At present, the refinery operates on a cost plus basisproviding little incentive for improving technical and economic effi-ciency or for exploiting market opportunities. As discussed in thesection on institutional reform, there is a need to make the refinerymore responsive to market conditions either directly through morecompetition, or indirectly through a pricing scheme which takes accountof conditions in international markets. Even if the refinery is economicon a long run basis there is no rationale for operating the refinery ifprice relationships (say through dumping of products) are such that thegross margin is negative (i.e., variable costs are not being covered).If these conditions persist for a significant period of time, it wouldmake sense to shut down the refinery's operations without firing thestaff. Such a policy would require close monitoring of the gross

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margin. By ensuring that the refinery does not operate when the grossmargin is negative, losses, if incurred, could be restricted to about thelevel of the refinery's fixed costs, $1.5 million. This policy is morelikely to be effective if the refinery is allowed to run as a commercialentity.

36. The main factors which support the refineries' viability are:(a) low operational cost due to reLatively efficient operations and theabsence of (expensive) expatriate staff; (b) freight advantage oftransporting crude relative to products due to Sierra Leone's location--the cost of transporting crude from Bonny in Nigeria (the usual source ofcrude supplies) is about half the cost of transporting products fromRotterdam, the base location for determining product prices, to Freetown;and (c) sunk capital costs of existing faczilities and the relativelymodest needs for future investment over the next 10 to 15 years. Therefinery's long term viability is assured as long as it is run effi-ciently, no major changes in refinery configuration are contemplated andSierra Leone continues to obtain crude at competitive terms from Nigeriarather than from a more distant source. As the refinery's economics arefinely balanced, a significant change in any one of the above threevariables, while unlikely, could make the refinery an uneconomic opera-tion and the Covernment should be aware of this sensitivity.

37. Although profits are likely to be modest, the refinery'sfinancial viability can be sustained as there are no major investmentrequirements anticipated over the foreseeable future. The start up ofthe Bumbuna scheme could reduce the refinery's profits by about$0.5 million but would not alter its economics significantly. Theselosses reflect the penalty to be paid on the sale of -urplus fuel oil atexport parity prices.

38. In terms of financial resuilts, the performance of the refineryhas been adversely affected in the recent past by (a) increased fuelconsumption and losses associated with frequent start up/shut down ofoperationis due to crude supply interruption, (b) delays in adjusting ex-refinery prices following increases in the Leone price of crude supplies,and (c) the continued inclusion of accrued interest on the Governmentdebt to the oil companies in the refinery accounts.

39. Main Recommendations

(a) The refinery should be retained as an operating unit. However,a least cost strategy should be implemented requiring theref'inery to operate only when variable costs are covered. Itslegal statutes and pricing policies should be reviewed toensure that it becomes more responsive to international marketconditions.

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(b) It should operate as a receiving terminal when prices makeoperations less attractive.

(c) The validity of charging accrued interest on oil company debtto the refinery's accounts should be teviewed.

Household Energy/Woodfuels Stratety

40. Estimates by the mission have confirmed the Government'sconcerns "hat risi:ig fuelwood costs are absorbing a significant propor-tion of the income of urban households (as much as an estimated 40 ofmonthly expenditures). In addition rising prices are a symptom ofgrowing regional shortages and deforestation near urban areas. Withoutsome measures for increasing supplies or reducing demand, especially inthe Peninsula Area as well as in the vicinity of Bo, Makeni, Koidu, andKenema, the cost of fuelwood supplies is expected to grow.

41. The most promising strategy fcr reducing woodfuel costs is theincreased use of improved stoves, whose efficiencies are about twice ashigh as conventional woodstoves currently available in the market. Thesestoves, which would be locally manufactured, could reduce wood demand by40-60% while incurring modest investment costs on the part of the con-sumer. A program of demand management centered on the utilization ofimproved stoves should be initiated. No expenditures should be requiredfrom the Government other than those for coordinating, testing, andpromoting private production and marketing of improved stoves. As thestoves are made from locally available scrap metal, there should also beno drain on foreign exchange resources.

42. Supply side measures should atso be initiated as part of aninteg.-ated approach to provide household energy at least cost. However,there are a number of problems associated with supply side measuresinvolving new fuelwood plantations. These include: (a) uncertaintyabout costs and competitiveness of the wood from these plantations;(b) resource constraint faced by the Forestry Services who will implementthese measures; and (c) uncertainty about the link between demand growthand deforestation. The mission recommends that the Government reviewplans for fuelwood plantations. Lower cost options should be examined,including agroforestry. Investments in the next few years should belimited to a few demonstration plantations for obtaining better infor-mation on yields and costs under different modes of management.

43. A higher priority on the supply side than plantations should begiven to better utilization and management of existing resources. Such aprogram could include the following components: (a) studying the poten-tial for increasing supplies from mangrcves and bush fallow agriculture,(b) natural forest protection, and (c) reviewing possibilities for bettercontrolling supplies to urban areas, for example through, city gate

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cAlIection of taxes, building of feeder roads to surplus areas, andincreasing the efficiency of traditional charcoaling techniques.

Investment Priorities

44. The following projects should receive the highest priority inthe public sector investment budget for the period 1987-1991:

Power:

(a) Rehabilitation of Kingtom and Falconbridge power plants($6.5 million).

(b) Strengthening of transmission and distribution networks in theWestern Area to meet expected load growth followingrehabil.tation of power plants ($3.3 million).

(c) Completion of Bo/Kenema transmission liaik ($1.8 million).

(d) Improvements to Provincial Systems, including spare iarts andcommunications ($3 million).

(e) Projects defined by priority investigations listed below undertechnical assistance.

Petroleuim:

There are no major petroleum investments to be financed by thepublic sector. A small amount of investment ($1.0 million) will berequired for the Government's share of building security stock ofcrude oil to 30 days of consumption (about 20,000 tons). (Another$0.55 million of public investments may be required for establishingretail outlets for kerosene and diesel in the rural areas and forthe Government share of investments in ernergy efficiencyimprovements at the refinery, if these investments are consideredviable.)

Woodfuels/Household Energ:

Demonstration fuelwood plantations ($1 million).

Deferred Investments

45. The following projects should be deferred and reviewedsubsequent to other recommended action.

(a) Major new generation and transmission projects pendingcompletion of Master Plan Study and review of the viability ofrehabilitating existing generating plant.

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(b) Heavy fuel generating plant investment ($7 million) planned forBo, under assistance from Danida, pending review of theviability of the scheme.

(c) Major fuelwood plantation investments pending completion of areview of the viability of such schemes based otn the experienceof ongoing and proposed demonstration projects.

IPriority Investigations and Technical Assistance

46. The following investigations and technical assistance should beinitiated during 1986/87.

Power:

(a) Consultancy services for evaluatin,g details of planned.ehabilitation, including repairs to MAN units, andimprovements needed in management practices and financialcontrol at. NPA ($0.1 million).

(b) Various studies incltuding those related to the Bumbuna scheme,mini hydro sites, and tariffs ($0.2 million).

(c) Power loss reduction study ($0.1 million).

Petroleum:

(a) Review of petroleum pricing structure and associated supplystrategy ($50,000).

(b) Design and development of accounting and information systems atthe DTI for monitoring and regulating domestic market($200,000).

(c) Exploration promotion or! offshore relinquishments ($0.5-1.5 million).

(d) Evaluation cf the viability of (i) establishing retail outletsin rural areas to be operated by cooperative/local groups, and(ii) investing in energy efficiency improvements at therefinery ($50,000).

Fuelwood:

(a) Preparation of a program for testing and promoting privateproduction and marketing of improved stoves for householdcooking ($600,000).

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(b) Strengthening of forestry department in areas of agroforestryand extension services as well as in the setting up of anImproved Stove Unit in the MEP for coordinating a program forimproved stoves ($500,000).

(c) Technical assistance (from donors) to eialuate the scope andbenefits of establishing regulatory control over the supply ofwoodfuels to urban areas and improving the efficiency ofcharcoal production ($50,000).

Energy Sector:

(a) Provision of technical assistance to MEP for advising on andimplementing improved energy sector coordination and planning($200,000).

47. While all the recommendations merit prompt consideration,perhaps the most important of these concern the need for technicalassistance to increase Sierra Leone's capacity for developing andimplementing a strategy for meeting its future energy needs.

I. ENERGY AND THE ECONOMY

The Economy

1.1 Sierra Leone is a relatively small (72,000 km2) tropicalcountry along the West African coast. It has a population of 3.7 millionpeople with v per capita income in 198" of US$330 and low levels ofsocial development: life expectancy is only 38 years, with infantmortality at 20%, 88% of the population has no access to safe water andabout 80% of the adults are illiterate.

1.2 The country has good agricultural, marine, mineral, and hydro-power potential but is one of the least developed countries in theworld. GDP grew by about 4.3% per year in the 1960s but at an averagerate of only 1.9% between 1973 and 1983. With the population growing byabout 2.5% annually, real per capita income was declining over the latterperiod.

1.3 The sectoral composition of GDP in 1984/85 is estimated at 35%agriculture, 20% transport and communication, 11% trade and tourism, 10%mining and quarrying, 6% manufacturing and handicrafts, and 18% otherservices. Foreign exchange is earned mainly by exporting minerals(i.e., diamonds, bauxite, rutile, gold, iron ore). Mineral exports haveaccounted for about 70% of export earnings in the 1980s.

1.4 The sluggish growth of GDP experienced in the 1970s, togetherwith a declining trend in per capita income, has continued with anaverage annual rate of 2.1% from 1979/80 to 1984/85. Underlying the poorperformance of the economy in the past 15 years are two distincttrends. The first is a cyclical one caused by declining export earnings,in turn the result of fluctuations in commodity prices and the wor.deconomy. The second is a secular trend marked by the gradual depletionof Sierra Leone's major mineral resources of alluvial diamond and ironore. In recent years the recorded production of diamonds, by far themost important source of foreign exchange, has fallen to less than one-tenth its level of a decade ago, while the production of iron ore ceasedaltogether in 1976 and was resumed for only two years on a smaller scalein 1982. Exports of other commodities have not yet substituted for thisdecline.

External Trade Gap

1.5 The Government has not successfully adjusted to either of theadverse trends. With increasing imports and escalation of oil prices,the trade balance deteriorated in the late 1970s and early 1980s.External funds borrowed to finance the rising trade and current accountdeficits accumulated into a public debt of over $400 million, equivalentto 27% of GDP, by end of fiscal year 1983. While the size of the trade

gap has diminished since 1983, the overall balance of payments positionhas remained under pressure: ir spite of a 20% improvement in exportsduring FY85, scheduled debt service payments in that year accounted for25% of !xport earnings, the current account deficit was $87 million,about 6% of GDP, and external arrears had increased to $285 millior, morethan double the level of exports. In conjunction with mounting arrearsand a rising debt service burden, most of Sierra Leone's foreign exchangeearnings have, for a few years, been flowing outside the banking systemthrough the "parallel" market where the exchange rate has been muchhigher than the official rate. The combined effect of these developmentshas beeli an acute shortage of foreign exchange at the disposal of theGovernment.

Recent Developments

1.6 By the time of the mission in February 1986, the economic andfinancial situation had become precarious, with a deteriorating balanceof payments, a thriving parallel market in foreign exchange, wideningbudget deficit, and inflation accelerating to a level in excess of 100%per annum. To recover from this economic crisis, the Government, onJune 27, 1986, announced a bold package of reforms as part of its FY87budget. The major elements of this program are: (E) a flexible exchangerate; (b) the removal of all subsid;es on petroleum and rice; (c) a moreliberalized trading regime with almost all commodities freely importable;(d) substantial increases in the producer prices of major export crops;(e) removal of controls on the prices of all commodities except monopolypublic utilities; and (f) structural adjustment changes to be implementedin the areas of public sector management, allocation of public expendi-tures, agricuitural policy, and industrial incentives. These reforms,still in various stg,ges of implementation, are consistent with theGovernment's dialogue with the International Monetary Fund (IIMF) and theWorld Bank.

1.7 The macroeconomic environment, which is still adjusting to thesharp changes in policy, shows no sign of stabilizing as uncertaintypersists regarding the Government's resolve to fully implement announcedreforms. A stand-by agreement reached with the IMF, and approved by itsBoard in November 1986, collapsed soon afterwards as agreed targets onbudget deficits and credit ceilings could not be met. The collapse ofthe stand-by arrangement with the IMF has coincided with a worsening ofthe economic situation: shortages of petroleum products have increased,inflation has accelerated sharply, reaching the 150% per annum rate inthe last six months of 1986, and the currency has depreciated rapidly.The official exchange rate was fluctuating in the Le 45-55/$ range inMarch/April 1987 compared with Le 5.10/$ at the time of the mission, oneyear earlier. A major factor underlying the rapid depreciation of theLeone has been excessive money creation to fund the increasing fiscaldeficit; the basic problem is that too many Leones have been chasing toofew dollars. At the same time, the amount of foreign exchange surren-dered to the banking system has declined due to uncertaintysurrounding the implementation of the IMF program, thereby adding

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pressures on the Leon;..

1.8 More recent discussions, held during March 1987, between theGovernment, the Bank, and the IMF, have led to the definition of a"shadow" program outlining new short term targets for fiscal deficits,credit creation, and the removal of subsidies on rice and petroleumproducts. Sierra Leone's performance under the "shadow" program willprovide a vital test of the Government's commitment to economic reform; asuccessful implementation of the program is expected to pave the way fora new stand-by agreement with the IMF and a structural adjustment loan(SAL) from the Bank during FY1987-88.

Economic Scenarios for Sierra Leone

1.9 In evaluating the issues in the energy sector and the implica-tion of different options, two scenarios--alternative views of what theworld would look like in the future--have been devel. ped. The keydifference between the scenarios relates to the timing and extent of theadoption in Sierra Leone of the economic reforms being currentlydiscussed with the IMF and the Bank. It may be mentioned that on severaloccasions in the past the Go-vernment, for domestic reasons, has beenunable to follow through on prior agreements with the Bank and theFund. Hence the two scenarios would remain valid even if currentdiscussions lead to a signed agreement.

1.10 In one scenario--Accelerated Growth (AG)--the proposed reforms(including significant increases in the prices of products to bring themin line with economic costs) are implemented to a large extent, if notcompletely, over the next two years, paving the way for significantcapitai inflows to the country. In the second scenario-- Base Case (BC)--the reforms are implemented in a very limited way and they come toolate--late 1980s or early 1990s--leading to prolonged economicstagnation.

1.11 The external environment, including oil prices, is assumed tobe the same in both scenarios, excep: for the analysis of the powerexpansion plan where two oil price profiles are proposed for eachscenario. In effect, therefore, there will be four swenarios for theevaluation of power expansion options including the Bumbuna scheme.

1.12 Details of these scenarios are give-i in Annex 1 both in termsof qualitative descriptions and quantitative values. Table 1.1summarizes the GDP and oil price assumptions underlying the twoscenarios.

Table 1.1: SCENARIOS (SUMMARY)

1986-90 1990-95 1095-2000

GOP Growth (% p.a.)

Base Case (BC) 0 2 2-3Accelerated Growth (AG) 3 5-6 4-5

1986 1990 1995 2000

Base oil prices a/ (S/barrel)

Current prices 20 23 39 48

Constant 1986 prices 20 18 25 25

Alternative oil prices b/ (S/barrel)

Current prices 10 13 30 40Constant 1986 prices 10 10 19 21

a/ Prices common to both scenarios.

b/ Alternative profile used for evaluating sensitivity of power expansion plans to oil

prices.Source: Bank projections, mission estimates.

Energy-Economy Interactions

1.13 Economic activity and energy sector developments have been

caught in a downward spiral. Economic stagnation, together with balance

of payments problems, have curtailed the demand and supply of energy. At

the same time shortages in energy, as well as the oil price shocks of the

70s, have disrupted economic activity. Energy-economy interactions aremost apparent in considering the constraint posed by the balance of pay-

ments. Lack of foreign exchange has reduced petroleum imports, disloca-

ted transportation, and limited the operation of petroleum based elec-trical power plants. Furthermore, shortages of imported spare parts have

restricted essential maintenance, increasing energy losses and reducing

operating capacity; "firm" electrical generating capacity has less thanhalved in the previous three years. In turn, the heavy claims of petro-

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leum imports on foreign exchange--these increased from 8% of exportearnings in 1972 to over 50% in 1982--(among the highest share as com-pared to neighboring oil importing countries) has constrained non-oilimports and acted as a drag on the economy. 1/ Once the economy recoversfrom its current malaise, a central issue is whether and how it will meetits growing energy requirement under the prevailing balance of paymentsconstraint.

Table 1.2: PETROLEUM IMPORTS AND EXTERNAL. TRADE(million current Leones)

1980 1981 1982 1983 1984 1985

Exports 224.1 176.9 136,6 201.8 331.0 627.7

Crude Oil Imports 67.3 91.4 61,3 88.1 153,1 166.1Petroleum Product imports 4.9 6.3 21.2 4.2 5.4 0.0 a/Petroleum Exports andBunker Sales 14.6 18.5 10.0 18.7 19.8 29.0 a/

Net Petroleum Imports 57.6 79.2 72.5 73.6 138.7 137.1

Net Exports (1) - (4) 209.5 158.4 126.6 183.1 311.2 598.7

Petroleum imports as % ofNet Exports (5) * (6) 27.5% 50.0% 57.3% 40.2% 44.6% 23.5%

Imports Financed from Outsidethe Banking System 227.5 194.8 277,4 9.8 152.0 466.8

Adjusted Exports b/(6) + (8) 437.0 353.2 404.0 192,8 463.2 1075.5

"True,, Ratio of oilimports to exports (5) - (9) 13.2% 22.4% 17.9% 38.2% 29.9% 12.7%

a/ Exciudes values of fuel oil exported in exchange for importation of gasoHine.b/ Assuming imports financed outside Banking system are equal to the total export

earnings retention in the same year.

Source: Bank of Sierra Leone, IMF statistics, mission estimates.

1/ It is important to note that if the official exports are adjustedfor unofficial earnings through the "parallel" market, then theproportion of foreign exchange earnings claimed by petroleum importsis reduced (see estimate in Table 1.2). The burden is neverthelessstill significant.

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Key Energy Issues

1.14 An overview of total and sectoral energy consumption in Siert;Leone is presented in the 1984 energy balance (Annex 2). Primary energysupply was about 1.2 million (toe) in 1984, or 310 kilograms of oilequivalent (kgoe) per capita, which is about average for countries withsimilar income and among the lowest levels in the world. About 80% ofprimary energy supplies were provided by domestic biomass energy in theform of fuelwood. The remaining 20% of primary energy requirements aremet by imported crude oil and its products, of which about 30% are usedis Sierra Leone's existing thermal-only power generation system. Thesemajor sources of primary energy, fuelwood and petroleum imports, are bothassociated with supply and financing problems which have seriousconsequences for the economy as a whole.

1.15 There is evidence of increasing fuelwood shortages near theurban centers combined with a deterioration in the size and the quality,f forest resources. The long term environmental effects of the deple-tor of forest cover and overcutting are difficult to estimate and couldbe significant. However, the more direct and obvious problem is thesteadily rising costs of fuelwood consumption: as revealed by surveyscarried out by the mission, shortages .n urban areas have led to largereal term increases iii the price of fuelwood over the past few years andfuelwood consumption now absorbs a relatively high proportion of house-hold income (see Chapter IV). The situation is particularly worrisome inthe Peninsula Area, as well as in the vicinity of the towns of Bo,Makeni, Koidu, and Kenema.

1.16 Yet, in spite of the urgency of corrective action, investmentsin the forestry sector have been minimal so far, Less than 2% of extern-ally financed investment, which accounts for around 75% of all fixedcapital investments in Sierra Leone, was allocated to projects forafforestation and charcoal production during 1981-84. Over the sameperiod, the electricity subsector, which represents only 2% of finalenergy demand, received over five times as much financing as the forestrysubsector. While the importance of electricity to the economy is likelyto be much greater than that revealed by its share in final encrgyconsumption (in part because the end-use efficiency of using electricityis five to six times higher than that for traditionaL fuels), there is aneed for the Government to review the composition of energy sectorinvestments in general and the allocation to forestry and fuelwoodrelated investments in partic lar.

1.17 Imported petroleum products are the only source of primaryenergy supply to the modern sector other than a limited amount of char-coal and fuelwood used by industry. As discussed above, petroleum im-ports are placing a significant burden on the balance of payments and the

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Government has been restricting imports since the early 1980s. Despitethese restrictions, the proportion of foreign exchange absorbed by oilimports has exceeded 40% since 1981, except for 1985 when the sharedropped to 23%, largely due to a 40% cutback in the volume of netpetroleum imports. The resulting disruption to the economy from the lackof fuel has been severe, especially in rural areas.

1.18 There are three issues which require the immediate attention ofthe Government. The first one relates to the existing shortages in thesupply of electricity and petroleum products, and the supply and demandside measures that should be undertaken to alleviate them. The secondone involves weaknesses in the coordination and management of the govern-ment ministries and parastatal agencies dealing with energy. Theseweaknesses represent a major obstacle to the efficient and reliablesupply of energy and exacerbate the disruptions caused to the economyfrom supply shortages when and as these have occurred. There is a needfor the Government to evaluate options for making these agencies moreeffective. The third short-term problem relates to distortions in energypricing which, as described in later sections of the report, have contri-buted to financial problems for the Government, the power utility, andthe refinery and have led to inefficient choice of fuels by consumers.Policy changes to remove these distortions and alleviate concomitantproblems should be urgently evaluated.

1.19 There are three long-term issues which focus on the developmentof the energy sector over the next 10 to 15 years. First, the optimallong-term strategy for developing the power sector must be determined.Within this context, the need for investment in hydroelectric schemesover the next 10 years should be assessed. Here the advantages ofreduced dependence on imported oil have to be balanced against theincrease in the economy's financial burden which the large and lumpyinvestment in hydro-schemes implies. Second, the economics of therefinery need to be examined, since it may under specific circumstancesbe cheaper to import products directly. Third, fuelwood supply at thenational and local levels should be studied to determine if there are anyimpending shortages of this resource and what can be done, in terms ofboth an investment program and policy initiatives, to improve fuelwoodsupplies and reduce household energy costs through more efficient use ofthe resource.

Energy Consumption Patterns

1.20 An overview of present and future energy consumption patternsis provided by the energy balance for 1984 as well as projections for

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1995, by scenario (see Annex 2). The implication of these balances foralternative policies is discussed below. 2/

1.21 Balances for 1984. Final energy consumption patterns based onthe 1984 energy balance are presented in Table 1.3 below. Final energyconsumption by sector is dominated by the residential sector (includinghome based craft activities). Households consume 86% of net domesticenergy supplies, while Lhe balance is divided up between transport (6%),industry (5%), mining (2%), and agriculture (1%). This distributionreflects the dominant role of traditional energy, mainly fuelwood. Thisis used, as already discussed, almost exclusively by households forcooking and craft activities, and generally with very low combustionefficiencies. The same comment applies to the use of charcoal.

rable 1.3 STRUCTURE OF FINAL ENERGY CONSUMPTION (1984)

(%)

Sector Fueiwood Charcoal Petroleum Power Total

Agriculture - - 6 - I

Mining - - 6 38 2Industry 3 10 15 40 5Transport - - 49 - 6

Households 97 90 24 22 86

100 100 100 100 100

735 39 118 19 911

('000 TOE)

Source: Mission estimates.

1.22 The sectoral distribution of final consumption of importedenergy presents a totally different picture. Transport is the majorconsumer of petroleum products, accounting for 49%, followed byhouseholds (24%), industry (15%), and agriculture and mining 6% each.

2/ Annex 2 also provides an energy balance for 1975 for referencepurposes. Household energy use figures for 1975 are based on theassumption that the consumption per capita was the same as estimatedfor 1984.

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This distribution reflects the low level of industrialization in SierraLeone and the insignificant use of petroleum products currently used byhouseholds for cooking and lighting.

1.23 Industry (including commercial enterprises) stands out as thebiggest electricity consumer with 40% of sales, while mines and house-holds consume 38% and 22% respectively. In energy terms the modernindustrial sector in Sierra Leone consumes almosc the same amount offuelwood and charcoal, totaling 26,000 toe, as it does of electricity andpetroleum combined (although the delivered energy in the case of fuelwoodis much lower because of conversion losses).

Consumption Patterns Under Alternative Scenarios

1.24 Final energy consumption patterns for 1995 under the AG and BCscenarios are presented in Tables 1.4 and 1.5.

1.25 Under an AG world, the net effects of a restructured economy,significant and feasible improvements in the efficiency of energy use,and the commissioring of the Reduced Bumbuma scheme are reflected in theenergy balance for 1995. Comparing Tables 1.3 and 1.4, the consumptionpattern is still dominated by household energy. However, there is someshift toward transportation and industry, whose share in total finalenergy consumption goes up from 5% and 6% respective'Ly in 1986 to 8% in1995. This limited increase in the share of economically active sectors,in spite of fairly rapid growth, reflects both the large weight of tradi-tional energy in current consumption and the emphasis in governmentpolicy under AG for growth based on expansion of agriculture rather thanindustry which is more energy intensive. The sectoral distribution ofimported petroleum products also signals the emphasis on agriculture; theshare of petroleum products consumed by agriculture increases from 6%to 8%.

Table 1.4: FINAL ENERGY CONSUMPTION, 1995,ACCELERATED GROWTH SCENARIO

(S)

Sector Fuelwood Charcoal Petroleum Power Total

Agriculture - - 8 - 1Mining - - 7 20 2

Industry 2 8 18 50 8Transport - - 47 - 8

Hoiseholds 98 92 19 30 82100 100 100 100 100

('000 TOE) 895 51 198 31 1174

Source: Mission estimates.

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1.26 Industry, however, continues to be the biggest consumer ofelectrical power with 50% of sales. The share of the mining sectordeclines significantly from 38% in 1984 to 20% due to a reduction inmining activity. Households increase their share of power to 30% partlybecause of steadily rising incomes.

1.27 In spite of GDP growth in the 4-5% range, total energyconsumption rises only at a modest rate of 2.4% p.a. from 911,000 toe to1,174,000 toe. This largely reflects the slow rate of growth in fuelwooddemand (1.8% p.a.); the rate of growth of fuelwood consumption is tem-pered by the use of more efficient stoves by a significant proportion ofthe population, as discussed in Chapter IV.

1.28 When comparing fuel energy consumption under AG with BC (asgiven in Table 1.5) the advantages of a restructured economy, and themore efficient use of resources becomes even more apparent. In spite ofstagnating economic activity (with GDP growth rates averaging 1% p.a.),total energy consumption averages a growth rate of 2.1% p.a. comparedwith 2.4% under AG. In the case of commercial energy (power pluspetroleum) the growth rate under BC is 2% p.a. (with an average CDPgrowth rate of 1% p.a.) compared with 5% under AG (with an average CDPgrowth rate of 4.5% p.a.). If the same ratio between GDP and energyconsumption growth had been maintained in AC as in BC, then commercialenergy consumption would have increased at a 9% p.a. rate: instead ofdoubling, the estimated consumption of imported petroleum products (andof electrical power) would have increased three-fold between 1984 and1995. The effect of policies in AC have significantly lowered the levelof energy consumption under that scenario, with attendant effects on fuelimports.

Table 1.5 FINAL ENERGY CONSUMPTION, 1995BASE CASE SCENARIO

(X)

Sector Fuelwood Charcoal Petroleum Power Total

Agriculture 6 - %

Mining - 8 25 2Industry 1 6 20 44 6Transport - - 46 - 6

Households 99 94 20 31 87100 100 100 100 100

('000 TOE) 929 50 148 21 1,147

Source; Mission estimates.

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Energy Resource Base

1.29 Sierra Leone is reasonably well endowed with energyresources. Its main domestic energy resources are woodfuels and thepotential for hydroelectric power. Fuelwood is by far the largest singledomestic source of energy in use.

1.30 Anual supply of fuelwood is currently estimated at around4 million m , 10% of which goes to Freetown. High forests which oncecovered most of Sierra Leone have been reduced to 4% of the land areathrough shifting cultivation, commercial logging and cutting forfuelwood. Most of the country is now covered with secondary forests invarious stages of degradation, or derived savannah. As fuelwood isobtained from both primary and secondary forests, the reduction in thesize of the former does not on its own give a complete picture of theavailable supply of fuelwood. Reforestation programs have yet to beimplemented in any significant way. The issue of future supplies andlikely scarcities of fuelwood, both at the regional and national level,is discussed in greate.r detail in Chapter IV.

1.31 There is a large, and virtually untapped, hydroelectric powerpotential conservatively estimated at about 1200 MW. Technically andeconomically the most promising site is at Bumbuna with an ultimatepotential of 305 MW installed capacity and 1460 GWh of electricity gene-ration. (This compares with existing installed capacity of 134 MW, 98%of which is oil fueled 3/ and a total output in 1984 of 194 GWh.) Afterinitial work, as part of a staged development of the Bumbuna project,further investment has been deferred awaitinig an improvement in economicconditions. Around 20 mini-hydro sites have also been identified forserving isolated load c-enters but their feasibility has not yet beenfully evaluated. The only development so far has been a mini-hydro plant(4 MW capacity) on the Goma river which is being built with Chinesehelp. The viability of, and steps needed for, developing Sierra Leone'shydroelectric potential are considered in detail in Chapter III.

1.32 As yet no crude oil has been discovered in Sierra Leonealthough an oil company, Amoco, is currently involved in offshoredrilling. There is a potential for petroleum offshore but limitedexploration activity has prevented an evaluation of this potential.

1.33 There are other domestic energy resources which could providesignificant levels of energy inputs in the future, yet their viabilityhas not been examined. These include: crop residues and solar energyfor uses such as fish and crop drying where they could substitute fordiesel and kerosene; alcohol from biomass such as cassava or molasses,

3/ A seasonal hydro-site exists in the Goma Valley with an installedcapacity of 2.4 M. However, it has been out of operation since1983.

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which can be used as a gasoline extender or for industrial purposes;lignite deposits, whose size and quality has not been properly surveyedsince their identification in the 1920s, and which could substitute foroil in power generation and as a supplement/substitute for fuelwood inthe household sectors. The potential for developing other energyresources is evaluated in Chapter IV.

Institutional Framework

1.34 A number of ministries are directly responsible for energysector functions. The MEP is responsible for coordinating all energyrelated activities. It also establishes and implements policy in thepower subsector, including the supervision of the NPA, the electricalpower utility. The importation, refining, and distribution of petroleumproducts is regulated by the MTI, while exploration activities forpetroleum (as well as for lignite) fall within the jurisdiction of theMinistry of Miies (MOM). The Ministry of Finance (MOF) has institutionalresponsibility for allocating foreign exchange for oil imports. The sameministry sets petroleurn product prices in collaboration with the MTI.The manda'. for the management and development of forestry and otherwoodfuel resources rests with the Ministry of Agriculture, NaturalResources and Forestry (MANRF). There is no ministry with the legalmandate to develop, research, and promote the use of alternative energyresources such as solar energy or agricultural wastes. The focal pointfor studies and research in this area, as well as on improved stoves andmore efficient charcoaling techniques, has to date been the Fourah BayCollege of the University of Sierra Leone.

1.35 An important influence on some energy sector activities isexerted by ministries which do not have a direct responsibility for thesefunctions. This is particularly true of hydroelectric development andothier major additions to the power system, since these projects absorbsignificant resources. Their priority in the national economic plan isreviewed and established by the Ministry of Economic Planning and Na-tional Development. Coordination is required on these projects betweenthe MEP, NPA, and the planning ministry, as well as with a number ofspecial purpose authorities. Other ministries with linkages to theenergy sector include Transport and Communications, and Social We'lfare,the latter for its role in trial programs for the dissemination ofimproved stoves.

1.36 In the private and parastatal sectors the principal energytrading entities are (a) the oil companies in various wholly private orjoint vencure arrangements with the Government of Sierra Leone; (b) NPA,the state-owned power utility; and (c) the Sierra Leone Petroleum Re-fining Company, the parastatal which operates the refinery. Fuelwoodcutting, transport, and marketing are almost entirely in the hands ofsmall private operators. Over the past few years various Non-governmentOrganizations (NGOs), including YWCA, PLAN International, and Bois deFeu, have become involved in experimental, non-commercial, fuelwoodrelated programs both on the demand side (more efficient use of fuelwood)and the management of supplies (village tree plantings).

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II. PETROLEUM

Introduction

2.1 The modern sector of the Sierra Leone economy is highlydependent on imported petroleum products for its fuel and powerrequirements. In recent years the economy has been unable to obtainregular and adequate supplies of petroleum and the ensuing shortages haveadversely affected the performance of almost all sectors.

2.2 The immediate reason for inadequate supplies has been thecountry's difficult foreign exchange situation--a problem that is alreadybeing addressed at the macro level in discussions underway between theGovernment, the IMF, and the Bank. However, petroleum shortages, as wellas their consequences have been exacerbated by inefficiencies in procure-ment arrangements, price distortions, and the inability of the Governmentto manage the shortages. The first aim of this chapter is to focus oncomplementary micro level measures which will help to reduce shortages aswell as the cost of supplies. A second objective is to consider theoptions open to the Government in the longer term to reduce the country'sdependence on petroleum and encourage the supply of petroleum products atleast cost to the economy.

2 3 This chapter is composed of four sections. Section 1 providesa brief overview of the subsector describing recent developments insupply, demand, and organizational structure. Section 2 looks intoshort-term decision making in three separate areas: (a) supply procure-ment arrangements; (b) demand management; and (c) institutionalcoordination. In each area options are examined and recommendations madefor raising efficiency and improving the supply demand balance. Section3 evaluates components of a long term strategy for the subsector in-cluding: (a) the viability of the refinery; (b) measures for enhancingoffshore exploration; and (c) establishing a balance between public andprivate sector activities. Section 4 outlines an investment and tech-nical assistance program for the subsector.

Recent Developments and Subsector Organization

2.4 FoLlowing a 3% per annum growth rate during the 1970s, consump-tion of oil products has been on a declining trend sinGe 1979-80 (Table2.1). The decline in consumption mainly reflects restrictions on importsnecessitated by foreign exchange and procurement problems, rather thanthe effec,t of domestic price changes or the sluggish performance of theeconomy. 4/ Petroleum supply shortages reached their peak in 1985 when

4/ Domestic prices for products declined in real terms over 1980-85,and GDP is estimated to have grown at a 2.1% rate.

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net imports of crude and products were restricted to 132,000 tons, 38%below the 1984 level of 212,000 tons. Total product sales in 1985, about152,000 tons, were below the levels of a decade earlier arn represented aper capita annual consumption of 41 kilograms (kg), one of the lowest forWest African countries. The low level of consumption in 1985 helped tosave foreign exchange, with oil imports dec.ining in value from$55 million to $33 million, or from 42% to 21% of total exportearnings. However, the cutback led to the most serinliq shortfalls todate causing widespread load shedding, excessive service station queues,high black market premiums for petroleum products, and disruption oftrarnsportation and other economic activities. Approximate estimates ofsuppressed demand by the mission suggest that gasoline and kerosenepurchases by consumers in 1985 were about 45% below what they would be ifsales were unrestricted. These developments underscore the immediate needto improve the reliability of oil supplies and secure adequate foreignexchange for oil purchases.

Tjble 2.1: PETROLEUM SUBSECTOR--8ASIC DATA1'000 tons)

1980 1981 1982 1983 19e4 1985

Petroleum trading

Crude imports 222 224 160 181 236 158Product imports 12 8 39 16 14 9

Product re-exports 51 63 33 46 38 55

Net imports 183 169 6'6 15 212 112

Ref in ngCrude processed 216 223 162 194 221 170Product output:

L=PG I 1 1 1 1

Gasoline 29 29 25 29 35 30Kerosene 43 44 30 40 41 25

Gasoil 73 77 56 62 78 59Fuel oil 63 64 44 53 56 47

losses (i) 3.4 3,7 4.0 4.5 4.6 5.1

GrowthProduct sales Rate (%)

1980-85

LPG I 1 I 1 I 1 +2Gasoline 41 39 38 34 38 34 -4

Kerosene 28 24 27 27 28 22 -4Gasoil 70 6